Allocation of Case-Work: Cases Selected at Workshop for Real-Time ‘Live’ Cases


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  • Day 1 & 2: Introduce ‘the manchester method’ as applied to the game theory and TCE perspective in a search for a real-time understanding of management as player type, market-as-a-game and patterns and predictions.

  • Allocation of Case-Work: Cases Selected at Workshop for

  • Real-Time ‘Live’ Cases

  • Day 2 and 3: Introduce relevant economics and game theory material – from interdependence to Prisoners’ dilemma.

  • Day 3: Group workshop presentation in the afternoon.



Understand management as ‘they are’ not as theory hitherto ‘assumed them’ to be

  • Understand management as ‘they are’ not as theory hitherto ‘assumed them’ to be

  • Management can be ranked (by type) and are faced with indifference trade-offs => something must come ‘top of the menu’: the 3rd variable or z. Trade off (x, y) to max z.

  • Firms are conduits of information flows (vertical chain)

  • Supply chain capacity constraints and technology-lag

  • Reducing price does not necessarily lead to an increase in revenues (elasticity)

  • Prices are primarily signals (observed behaviour)

  • Companies understand the competitive threat as (recognised) interdependence (zero-sum and entropy)



  • Learning Plan is to follow Besanko’s Economics of Strategy 6th Edition ..selected Chapters and cases/examples.

  • Day 1 : Synopsis of E-Tutorials and Revision of Chapters 3 and 4 (Vertical Boundaries of the Firm, Agency and Co-ordination) and Introduce Chapter 2 (Economies of Scale and Scope)

  • Day 1: Game Dimension and Introduce Workshop Case Analysis

  • Day 1: Introduction and setting the scene using McNutt’s Decoding Strategy 2nd Edition Chapters 1 to 9 as required

  • Day 2 & 3: Focus on Besanko Part II: Chapters 2,3,5,6,7 and 8 and link into Units 3 and 4



  • Management type and relevance of TCE: Unit 1. Besanko Ch 3 & 4 and 5, McNutt Ch 1

  • Cost leadership and economics of capacity: Unit 2. Besanko Ch 2 and McNutt Ch 5

  • Dynamic games, Market-as-a-game…market structure, oligopoly & Nash payoffs: Units 3 & 4. Besanko Ch 5,6,7 and 8 and McNutt Ch 6-9.

  • Real Time case Analysis…go to Appendix in Decoding Strategy text.



Observed behaviour (inductive) in a game dimension. G

  • Observed behaviour (inductive) in a game dimension. G

  • Identify the players in the game and the player’s type

  • Finding the patterns in rival behaviour

  • Updating belief systems.

  • Independent decision making v interdependence; one-shot v repeated play

  • When in a game? – recognise interdependence?



Knowledge of the identity of a near rival:

  • Knowledge of the identity of a near rival:

  • Actionyou -> Reactionnear-rival ->…

  • ..-> Reactions……NashReplyyou…..







Principal-agent relationship

  • Principal-agent relationship

  • Shareholders as principals and management as agents

  • Who are decision makers?

  • Management ≈ firms ≈ companies

  • =

  • PLAYERS (key decision makers)



Agency costs can accrue across the shareholders (esp institutional & activist shareholders)..changing CEOs.

  • Agency costs can accrue across the shareholders (esp institutional & activist shareholders)..changing CEOs.

  • Bounded rationality and opportunity costs with trade-offs

  • Make or Buy dilemma

  • First Mover Advantage (FMA) v Second Mover Advantage (SMA)

  • Play to win v Play not to lose!

  • Follower status ‘behind the curve’

  • Technology lag and failure to differentiate ‘fast enough’ to sustain a competitive advantage

  • Near rival will try to minimise your gains by playing a minimax strategy



The Firm as a ‘nexus of contracts’

  • The Firm as a ‘nexus of contracts’

  • Vertical chains and agency costs

  • Shareholders and management-as-agent

  • Make-buy dilemma and incomplete contracting

  • Type of management and Bounded rationality



Coase asked in ‘ The Nature of Firms’ in 1937:

  • Coase asked in ‘ The Nature of Firms’ in 1937:

  • Transaction costs: costs of negotiating, monitoring and enforcing contracts.

  • Behavioural assumptions: bounded rationality & opportunism.

  • The relative cost of organising transaction through different forms of governance determined by:

    • Extent to which complete contracts are possible. Where contract refers to agreement between two parties which could be explicit or not.
    • Extent to which there is a threat of opportunism by parties in the transaction.
    • Degree of asset specificity in the transaction.
    • Frequency with which the transaction is repeated.


Understand Penrose effect

  • Understand Penrose effect

  • Understand Bounded Rationality

  • Go to Table 1.2 pp21 McNutt DecodingStrategy

  • Compare with Next Slide where you add in Williamson/TCE





Traditional Analysis is focused on answering this question for Company X:

  • Traditional Analysis is focused on answering this question for Company X:

  • what market are we in and how can we do better?

  • Economics of strategy (T/3) asks:

  • what market should we be in?



Recognise zero sum constaint and entropy (redistribution within market shares)

  • Recognise zero sum constaint and entropy (redistribution within market shares)

  • Market Shares (before): 40+30+20+10

  • Zero-sum (after): 30+40+20+10

  • Entropy (after): 30+35+25+10

  • Hypothesis: Iff {∆qi/∆Q} > 0 market exhibits non-price competition:

  • Check {∆qNOKIA/∆QSmartphones} < 0





McNutt Ch 4: Understand balanced equation of ‘trade-offs’ to identify parameters of profitability = next slide

  • McNutt Ch 4: Understand balanced equation of ‘trade-offs’ to identify parameters of profitability = next slide

  • Supply of capital: debt v equity

  • Demand for capital: R&D exp v dividends

  • Instrumental variables influencing growth – visit Diageo case in Kaelo v2.0

  • KFIs: profits/output and output/capital

  • Tobins q and Marris v ratio





Calculating share price by DCF formula

  • Calculating share price by DCF formula

  • P = eps/r : Static firm no growth opportunities

  • P = eps/r + PV(GO): Dynamic firm with growth opportunities…this is a Marris firm

  • Common denominator is the plough-back ratio (PBR) = 1 – divs/eps…This is a Marris equation

  • More dividends can signal an absence of R&D growth

  • But more R&D from G1 to G2 can accrue an agency cost as Bayesian shareholders SELL as value falls V1 to V2.



Shareholder as principals expect max value

  • Shareholder as principals expect max value

  • Management to minimise the agency costs

  • Positive Learning Transfer, PLT

  • Nomenclature on type: Baumol type (signal = price), Marris type (signal = dividends).

  • Cost leadership type (link into Besanko Ch 11 & 13 on strategic cost advantage)



Profitabiltiy v scale and (size and scope)

  • Profitabiltiy v scale and (size and scope)

  • Production as a Cost-volume constraint

  • Understanding the economcis of productivity as exemplar for incentives

  • Normalisation equation

  • Sources of Cost Efficiency [next slide]

  • Cost leadership 5 Steps Checklist..McNutt p78



Measure of the level of resources needed to create given level of value

  • Measure of the level of resources needed to create given level of value





Case A: Unexhausted economies of scale due to product differentiation

  • Case A: Unexhausted economies of scale due to product differentiation

  • Case B: Firm-as-a-player does not produce large enough output to reach MES

  • Case C: Firm-as-a-player restraints production (deliberate intent)..McNutt’s dilemma as production drives demand…(Veblen monopoly type)

  • Convergence of technology increases the firm-specific risk of Case C:

  • Strategic Choice A or B or C?



Decisions are interpreted as signals

  • Decisions are interpreted as signals

  • Observed patterns and Critical Time Line (CTLs). Go to Appendix in McNutt

  • Recognition of market interdependence (zero-sum and entropy)

  • Price as a signal v Baumol model of TR max

  • Scale and size: cost leadership

  • Dividends as signals in a Marris model



  • Study of strategic interactions: how firms adopt alternative strategies by taking into account rival behaviour

  • Structured and logical method of considering strategic situations. It makes possible breaking down a competitive situation into its key elements and analysing the dynamics between the players.

  • Key elements:

    • Players. Company or manager.
    • Strategies.
    • Payoffs
  • Equilibrium. Every player plays her best strategy given the strategies of the other players.

  • Objective. To explore oligopolistic industries from a game embedded strategy (GEMS) perspective.

  • The use of T3 framework, which considers 3 key dimensions (Type, Technology & Time), will allow oligopolists to better predict the likely strategic response of competitors when analysing competition from game embedded strategy perspective.



Binary reaction; Will Player B react? Yes or No?

  • Binary reaction; Will Player B react? Yes or No?

  • If YES, decision may be parked

  • If NO, decision proceeds on error

  • Surprise



Players and type of players

  • Players and type of players

  • Prices interpreted as signals

  • Understand (price) elasticity of demand and cross-price elasticity

  • Patterns of observed behaviour

  • Leader-follower as knowledge

  • Accommodation v entry deterrence

  • Reaction, signalling and Nash equilibrium: ‘best you can do, given reaction of competitor’



Incumbent type v entrant type

  • Incumbent type v entrant type

  • Dominant type v predatory incumbent

  • De novo entrant type and geography of the market

  • Potential entrant type and the threat of entry as a credible threat

  • Contestable markets, newborn players and extant (incumbent) type



Reputation of the incumbents

  • Reputation of the incumbents

  • Capacity building

  • Entry function of the entrant

  • De novo and entry at time period t

  • Potential entrant - forces reaction at time period t from incumbent

  • Coogan’s bluff strategy (classic poker strategy) and enter the game.



Nash premise: Action, Reaction and CV matrix

  • Nash premise: Action, Reaction and CV matrix

  • Non-cooperative sequential (dynamic) games

  • TR Test McNutt pp48..one-shot move

  • Limit price [to avoid entry] and predatory pricing to force exit.

  • Near rival plays Minimax, so I play Maximin [focus on my worst minimum payoff and try to maximise].

  • Segmentation strategy to obtain FMA

  • Relevance of ‘chain-store’ tumbling price paradox

  • Dark Strategy and 3 Mistakes in McNutt pp117-118



Outline the game dimension: dominant incumbents v camouflaged entrant type

  • Outline the game dimension: dominant incumbents v camouflaged entrant type

  • Define strategy set for incumbents

  • Allow entry and define the equilibrium

  • Preference - entry deterrent strategy v accommodation [next slide]





Define the Nash equilibria [next slide]

  • Define the Nash equilibria [next slide]

  • Analyse the Payoff matrix

  • (B,Y) > (A, X)

  • Commitment and chat: one-shot and repeated play

  • Punishment ‘grim’ strategy

  • Strategy Set in terms of credible mechanisms





Determine the Bertrand reaction function:

  • Determine the Bertrand reaction function:

  • Besanko Fig 5.3 pp190 and McNutt Fig 9.4 p143

  • Compute a Critical Time Line (CTL)from observed signals..Examples of CTL in McNutt in the Appendix

  • Find a price point of intersection

  • Case Analysis of Sony v Microsoft at McNutt pp 141-144 and also in Kaelo v2.0



Hypothesis: Bertrand Price Wars occur due to a mis-match in price signals.

  • Hypothesis: Bertrand Price Wars occur due to a mis-match in price signals.

  • Mismatch can occur due to (i) declining volumes ∆qi/∆Q < 0; (ii) uncompetitive cost structure; (iii) decreasing productivity; (iv) management type (predator); (v) calling-my-bluff

  • Price hierarchy and ‘folk theorem’ on focal points.



Simultaneous game between A & B who must decide on how to spend the evening.

  • Simultaneous game between A & B who must decide on how to spend the evening.

  • Problem of coordination where players have different preferences but common interest in coordinating strategies.

  • One key application includes the battles for standards:

      • VHS by JVC vs Betamax by Sony in the 1980s
      • BlueRay DVD by Sony vs HD DVD by Toshiba in 2008
      • iOS v Android v Win8
  • Effect of sequentialisation? Solution. Commitment? Signalling?



Two rival companies must simultaneously decide which products to research.

  • Two rival companies must simultaneously decide which products to research.

  • Does this example illustrate the concept of ‘first mover advantage[FMA]?

  • How could companies signal? Check the cases and examples in class with Folk theorem











Check Examples of Critical Time Line in the Appendix of McNutt’s text Decoding Strategy.

  • Check Examples of Critical Time Line in the Appendix of McNutt’s text Decoding Strategy.

  • Play the PD game and investment game in Kaelo v2.0 as outlined in class

  • Selfish gene [one-shot], dominant strategy to cheat. Schelling move, ‘loading the dice’.

  • Near rival will play minimax – repeated play/learning and mixed strategy.

  • Watch for final E-tutorial announcement.

  • .




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